No entity could earn gross receipts, only profit embedded to be treated as income.

No entity could earn gross receipts, only profit embedded to be treated as income. ITAT upholds the order of CIT(A) as appreciating the controversy in right perspective

ABCAUS Case Law Citation:
ABCAUS 2672 (2018) (12) ITAT

Important Case Laws Cited / relied upon:
Commissioner of Income Tax Vs. President industries (2002) 124 Taxman 654
Commissioner of Income Tax Vs. Samir Synthetics Mills (2001) 326 ITR 410
Commissioner of Income Tax Vs. Gurubachhan Singh (2008) 171 Taxman 406
Commissioner of income Tax Vs. Balchand Ajit Kumar 135 Taxman 180
Kishor Mohnalal Telwala Vs. AC/T (1999)^7 Taxmann.com 86
Sairam Multi Speciality Hospital Vs. ACIT, (2014) 40 CCH 0132

Revenue was in appeal before the Tribunal against order of the CIT(A) in deleting addition made by the AO on account of unaccounted income earned by the assessee by way of suppression of professional receipts.

The assessee was proprietor of a Clinical Laboratory which was subjected to a survey action under section 133A of the Income Tax Act, 1961 (the Act).

During the course of survey, certain loose papers reflecting unaccounted receipts were found and impounded. These loose papers pertained to the period of six months of which sum total was worked out by the AO.

According to the AO, the assessee failed to explain as to how these unaccounted receipts have been recorded in the regular books of accounts. On the basis of these evidences, pertaining for period of six months, the AO interpolated receipts for the whole year and worked out such unaccounted receipts. The AO further observed that balance sheet from regular books of accounts, was drawn out and receipts for nine months had been shown by the assessee. He worked out the figures for the complete year. Against these, the AO gave credit for the amount declared by the assessee during the search and the balance has been added to the total income of the assessee as unexplained receipts.  

Dissatisfied with this addition, the assessee carried the matter in appeal before the CIT(A). The CIT(A) upheld the conclusion of the AO for working out unexplained receipts. However he observed that once unaccounted income of the assessee had been estimated for the completed year on the basis of evidence found pertaining to six months period, then it would show that books of accounts maintained by the assessee were not reflecting true pictures and these books have to be rejected. Once the books are rejected, then profit earned by the assessee during the year has to be estimated.

The CIT(A)further observed that profit on these unaccounted receipts being estimated taking into consideration average profit of the assessee for the last five years, then extra income disclosed by the assessee would take care of the profit earned by the assessee by way of these unaccounted receipts.

Accordingly, the CIT(A) deleted addition made by the AO. Dissatisfied with the order of the CIT(A),Revenue was appeal before the Tribunal.

The Tribunalobserved that in view of the provisions of Section 145 of the Act, the Assessing Officer is required to point out the defects in the accounts of Assessee and required to seek explanation of the assessee qua those defects. If the assessee failed to explain the defects than on the basis of the book result, income cannot be determined and Assessing Officer would compute the income according to his estimation keeping in view the guiding factor for estimating such income.

The Tribunal noted that the books had been rejected and no one challenged rejection of that books before the Tribunal. The finding had been accepted by the assessee as well as by the Revenue. The Short question was that, after rejection of the books, whether gross receipt are to be treated as income of the assessee or only profit embedded in those receipts ?

The Tribunal observed that once the AO had worked out unaccounted receipts for the whole year on the basis of evidence found for the period of six months, then such working was based on an estimate and assumption, and in the same manner corresponding expenditure ought to be assumed and estimated, because no entity could earn gross receipts. The Assessing Officer (AO) ignored it on the ground that evidence was not submitted by the assessee exhibiting incurrence of expenditure which was not correct approach at the end of the AO.

The Tribunal opined that the CIT(A) had appreciated the controversy in right perspective and in placing reliance upon the judgment of Hon’ble jurisdictional High Court.

Accordingly,the Tribunal dismissed the appeal of the Revenue being devoid of any merit.

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